Hedgers, Speculators, & Liquidity

Hedger:A person who takes a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment.

In addition to hedgers, we have speculators, which are the people that take the opposing side of these hedged trades. In layman’s terms, if a hedger needs to sell, the speculator will buy, and vice versa.

Speculator:A person who trades...with a higher-than-average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.

Why is the back-and-forth relationship between hedgers and speculators so paramount? Well, because speculators take on the risk of market fluctuation, which provides liquidity to the markets. Liquidity allows everyone to enter and exit the market easily.

Liquidity:The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

In other words, liquidity enables the market to ebb and flow, providing opportunities to buy or sell at every price level. Without it, no one would be able to get the prices they wanted. If a speculator is “long”, then he or she wants the market to go up in order to sell at a higher price. And, if a speculator is “short, then he or she wants the market to go down in order to buy back at a lower price.

Here, we enter the oft-misconstrued concept of “selling without owning something”—basically, all that means is that the speculator has no intention of delivering or receiving the goods he or she trades; but rather, taking advantage of price movement in a quest to become profitable.

Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.